Tantalus Systems Holding Inc

TSX:GRID

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and welcome to the Tantalus Systems' First Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Deborah Honig, Head of Investor Relations. Please go ahead.

[Deborah Honig]

Thank you, operator. Thank you for joining us to discuss Tantalus Systems' financial results and operating performance for the 3 months ended March 31, 2024. Tantalus issued these results in the press release yesterday, which is posted on the company's website.Joining me today on the call from Tantalus System here and referred to as Tantalus or the Company are Peter Londa, President and Chief Executive Officer; and George Reznik, Chief Financial Officer.During the call, we will make forward-looking statements about Tantalus's business. These statements are subject to certain risks and uncertainties, which could cause actual results to differ materially. Tantalus refers conference call participants either today or in the future to the company's forward-looking statements contained in the presentation and on our website at www.tantalus.com.Statements made on this call reflect management's analysis as of today, May 8, 2024. Management does not assume any responsibility or obligation to update forward-looking statements made during this conference call unless required by law. Please note that the financial information referenced on today's call is stated in United States dollars and in accordance with IFRS, unless otherwise stated.The company is also presenting selected non-IFRS financial measures, including gross profit, gross profit margin, adjusted EBITDA, recurring revenue, annual recurring revenue referred to as ARR, and adjusted working capital. Tantalus believes these non-IFRS measures provide meaningful information to investors. However, they do not have a standardized meaning and are not likely comparable to similar measures presented by other issuers.I'll now turn the call over to Peter Londa, President and CEO. Please go ahead, Pete.

[Peter Londa, executive]

Thanks Deb. Good morning, everybody. Thanks for joining, our Q1, 2024 earnings call update. Before we dive in, on behalf of our entire team at Tantalus, George and I, are pleased to provide today's update. We'll aim to work through our presentation in a timely manner, and provide ample time at the end of today's call for some Q&A.As you can see on Slide 3, we made good progress during the first quarter towards executing our 2024 plan. While we are witnessing strong momentum on the heels of recently announcing -- securing Underwriter Laboratories or UL certification for the TRUSense Gateway, we are reporting a decline in revenue year-over-year.To cover this topic first, the decline in revenue is not reflective of a problem, market opportunity, or an indication of any issue in our business. To the contrary, the Q1 revenue that we delivered is a function of the timing of securing orders from our pipeline, which can vary across a quarter, a calendar year, or month-to-month. We saw some orders that were expected to convert in sufficient time, to contribute revenue in Q1, take a little longer across the finish line.In summary, the timing of our orders that ties to revenue within a quarter, can sometimes be a bit lumpy, as some may say. But we believe the timing of orders and corresponding impact to revenue on a quarter-to-quarter basis will continue to smooth over time, particularly as we scale the business.Beyond addressing the shortfall in revenue year-over-year, I would like to reference that we had another strong quarter of revenue contributions from our Software and Services segment, which continues to scale year-over-year as we execute our plan. Similarly, we witnessed 16% growth year-over-year in our annual recurring revenue, which we report on a go forward 12-month basis.We also delivered another strong quarter of gross profit margin at 53%. As it relates to adjusted EBITDA, management's perspective is the negative performance in Q1 is justified, as we accelerate towards the launch of the TRUSense Gateway. The adjusted EBITDA results for Q1 are manageable relative to our balance sheet, and in line with our own internal expectations.As previously communicated, we expect to deliver negative adjusted EBITDA during the first 6 months of this year, but we remain confident in our ability to deliver positive adjusted EBITDA for the full year 2024. Beyond our financial results, our sales organization hit it out of the park in Q1. Our team converted $21.6 million in orders during the quarter, blowing through our previous corporate record for orders converted in a quarter by over 20%.Our previous high watermark for orders converted in a quarter was last year Q1, where we converted just over $17 million in orders. So beating that number by more than 20% is a strong indicator that we remain on a favorable trajectory, and that we anticipate growth moving forward. In addition to the record number in orders from a dollar perspective, we also added 5 new utilities, bringing our user community to 293.Last but not least, for those of you that have tracked our performance continually, we were extremely pleased to announce the UL certification for the fiber version of the TRUSense Gateway. I would note that the UL certification on the fiber TRUSense Gateway is also applicable for the Cellular Gateway.As we accelerate towards commercialization, through available for sale references internally, on the Fiber Gateway, we are turning our attention to finalizing the work that needs to be done to secure FCC certification for the Cellular Gateway, and we have commenced the certification process for the Ethernet Gateway early in Q2. Overall, we're pleased with the quarter.I'll now turn it over to George, who will walk you through the financial results. George, over to you.

[George Reznik, executive]

Thank you, Pete. And good morning, everyone. Before diving into the financial results, I would remind everyone that we report in U.S. dollars.As reflected on Slide 4, we delivered $9.4 million in revenue for the first quarter of 2024, representing a 10% decline from the prior year quarter of $10.4 million. As Pete mentioned, our Q1 revenue results were impacted by capacity allocations with metering partners and the timing of order fulfillments.This resulted in revenue shifting out of the quarter, and into future periods. We do not see our Q1 results as problematic or indicative of future results throughout the balance of the year.Gross profit margin increased to 53% for the first quarter of 2024, representing strong growth over the prior year quarter of 47%. This increase in gross profit margin helped us offset the decrease in revenue in the quarter.The company's operating expenses, during Q1 of 2024 were impacted by increased marketing programs, inclusive of attendance of 2 major industry trade shows, DISTRIBUTECH and TechAdvantage, in addition to continuing to invest approximately $1.5 million in the TRUSense Gateway development and commercialization.As such, we delivered adjusted EBITDA of negative $536,000 during the first quarter of 2024, which represents an improvement over the prior year quarter of negative $692,000. We experienced a net loss of $1.6 million during the quarter, which has expressed net of approximately $600,000 in non-cash expenses, comprised of depreciation and amortization, share-based compensation, and foreign exchange.Digging into our revenue and gross profit margin on Slide 5, revenue from our connected devices was $5.8 million in Q1 of 2024, which decreased from the prior year period and contributed 62% of total revenue. While revenue from connected devices was down, we increased the revenue contribution from software and services in Q1 of 2024 by 7% to $3.6 million.Revenue from our Software and Services represented a healthy 38% total revenue in the quarter. Within our Software and Services revenue segment, we include recognized recurring revenue in each period. As a reminder, our recurring revenue is comprised of software-as-a-service or SaaS subscriptions, term-based software licenses, software maintenance, technical support, and hosting services.Recurring revenue recognized during the first quarter of 2024 increased by 11% over the prior year period to $2.6 million. Recurring revenue represented 28% of total revenue in Q1 of 2024, increasing from 23% in the prior year period.While not reflected in the chart, I'll note that our annualized recurring revenue or ARR as of March 31, 2024, increased to approximately $11.6 million, reflecting 16% growth from the ARR at the end of Q1 of 2023. As a reminder, ARR represents a forward-looking forecast that reflects the anticipated total recurring revenue to be generated over the future 12-month period at a point in time.Disaggregating the gross profit margin further, connected devices' gross profit margin increased to 42% in Q1, as opposed to 34% in the prior year period. The higher gross profit margin for connected devices in the quarter resulted from prudent management of the company's supply chain, normalization of logistic expenses, and mitigation of the impact from inflationary pressures through previously instituted price increases.Gross profit margin for our Software and Services segment remains strong at 72% in the quarter. We witnessed contributions from installation service revenue in Q1 of 2024, which has a lower gross profit margin contribution relative to the prior year quarter.In evaluating the trailing 12 months of performance through March 31, on Slide 6, we are pleased to report that our revenue increased to $41.1 million, representing growth over the prior trailing 12-month period.Gross profit margin increased to 54% during the trailing 12 months to Q1 of 2024. This is an important achievement to drive continued operating leverage as the business scales. We generated positive adjusted EBITDA during the trailing 12 months through Q1 of 2024 in the amount of $126,000, representing strong improvement over the prior year, which was negative $2.5 million.We made this improvement while continuing to make significant investments in our innovative solutions, and in particular the TRUSense Gateway. The company invested approximately $5.5 million during the trailing 12 months through Q1 of 2024 in the development of the TRUSense Gateway, inclusive of over $1.8 million of external costs.Said another way, had we not made the investments in these external costs to support the development of the TRUSense Gateway, during the trailing 12 months to Q1 of 2024, it's fair to assume that there would be a dollar-for-dollar improvement for the investment made in external resources in our adjusted EBITDA result. The company experienced a net loss of $1.6 million during the trailing 12 months to Q1 of 2024.Our net loss is expressed net of significant non-cash expenses as indicated previously, with approximately $2.5 million of non-cash expenses during the trailing 12-month period ended Q1 of 2024, which exceeded the net loss amount. We anticipate migrating to net income in future, by continuing to drive increasing and continued year-over-year performance.Across the board, we believe that Tantalus delivered favorable results for the trailing 12-month period ended Q1 of 2024 and have already turned our attention to scaling the business further through the remainder of 2024.The composition of a revenue and related gross profit margin experienced during the trailing 12 months to Q1 of 2024, is provided on Slide 7. Revenue from our connected devices totaled $26 million, and contributed 63% total revenue during the trailing 12 months to Q1 of 2024.We continue to experience strong contributions from software and services, which represented 37% of total revenue during the trailing 12 months of Q1 of 2024, an increase by 15% to $15.1 million over the prior year trailing 12-month period.Recurring revenue recognized during the trailing 12-month period to Q1 of 2024, increased by 16% to $10.4 million, representing 25% of total revenue. Disaggregating the gross profit margin further, the gross profit margin for connected devices increased to 42% during the trailing 12 months to Q1 of 2024, from 35% in the prior 12-month period.The increase is tied to product mix, prudent management of our supply chain, normalizing logistics expenses, and previously implemented price increases. The gross profit margin for our Software and Services segment was 73% during the trailing 12 months to Q1 of 2024, which is consistent with the prior trailing 12-month period.As reflected on Slide 8, we closed the quarter with a cash balance of $5.4 million. Our cash balance increased on March 31, 2024, from December 31, 2023, due to several factors including the release of restricted cash of $673,000 due to the satisfaction of a customer implementation performance obligation during Q1, the adjusted EBITDA experienced in the quarter, the receipt of customer payments for the 2024 ARR during Q1, of which the majority is invoiced on an annual calendar basis, and the net movement of working capital items.Disaggregating our working capital items further, I'd like to review changes in our accounts receivable, inventory, accounts payable, and deferred revenue balances. Accounts receivable increased by $2.3 million from December 31, 2023, to a closing balance of $10.2 million as of March 31, 2024.The increase in accounts receivable during Q1 is due to the timing of revenue experienced in the quarter and the collection of 2024 ARR in Q1. We have subsequently experienced significant cash receipts since Q1 of 2024, and are working to normalize our accounts receivables day sales outstanding or DSO going forward.We continue to manage our inventory balances after witnessing a higher balance in the middle of last year. During Q1, we witnessed a decrease in inventory levels from the prior quarter by $863,000 to land at $5.8 million on March 31, 2024. We will continue to prudently manage our supply chain for existing products while also ramping up to produce the TRUSense Gateway through the next 3 quarters.It is worth noting that the inventory decreased by $2.4 million over the last 6 months since the end of Q3 2023. As for accounts payable and accrued liabilities, we saw a decrease of $1.9 million to $11.9 million during Q1. It is worth noting that accounts payable and accrued liabilities decreased by approximately $4.4 million over the last 6 months since the end of Q3 2023.Lastly, deferred revenue increased by $4.1 million from the prior quarter, due to the 2024 ARR customer payments invoiced and also received. These payments will be offset by revenue recognized each quarter throughout the year. Cash was also impacted by the repayment of lease liabilities, capital expenditures, and finance expenses incurred on the bank and EDC loans during Q1.As reflected on Slide 9, regarding quarter end balance sheet highlights, adjusted working capital decreased to $2 million as of March 31, 2024, from the prior quarter due to the adjusted EBITDA experience, finance expenses, lease liability repayments, capital expenditures, and the net movement of working capital items addressed previously.We maintain favorable terms with our key suppliers to manage accounts payable relative to the terms that we have been able to routinely negotiate with our customers for accounts receivable. The net difference between our terms and accounts receivable as compared to the terms on our accounts payable afford us with flexibility to scale and support the business going forward.The company has been working to normalize its investment in inventory and related accounts payable with key vendors, as evidenced in the decreased balances since Q3 of 2023. This will enable the company to enhance management of its cash conversion cycle going forward, to support the anticipated scale of the business and the impact of commercialization of the TRUSense Gateway.Beyond adjusted working capital, the company ended Q1 of 2024 with $35.5 million in total assets and an outstanding total debt balance of $11.5 million, which remained the same from the end of 2023. It should be noted that we continue to have $4 million of availability under the EDC debt facility, the remaining collection of our 2024 ARR after Q1 of 2024, and the visibility into our 2024 revenue profile.In summary, the company is managing our working capital to support our ongoing operations and the anticipated commercialization of the TRUSense Gateway.I will now turn it back over to Pete, to provide an update on our TRUSense Gateway and key initiatives for the remainder of 2024.

[Peter Londa, executive]

Thanks, George.As reflected on Slide 10, we find ourselves at the intersection of the electrification of everything and the need to modernize the electric distribution grid. We refer to that internally as grid modernization. These 2 investment theses, intersect through the TRUSense Gateway and the response we continue to witness from the industry continues to validate our belief that Tantalus is at the right place at the right time.Before providing further updates, I would truly like to congratulate the members of team Tantalus, who work tirelessly on behalf of our shareholders to bring the first version of the TRUSense Gateway to market. Our recent announcement referencing the successful completion of the UL certification for the TRUSense Fiber Gateway is not only a milestone for Tantalus, but we believe an important milestone for the utility industry.The reason for that is the TRUSense Gateway provides a significant number of benefits, by delivering on multiple use cases for utilities, whereby each use case individually can justify the ROI decision made by utilities on a standalone basis. Effectively, we built a device that can knock down 4 birds with 1 stone.The multi-purpose nature of the device expands the number of challenges we can address for utilities, which we believe will not only drive adoption across a very wide range of utilities, including investor owned, but utilities across the board that are stuck and relying on legacy metering infrastructure that does not meet evolving regulatory drivers or the advancement of electric vehicles, distributed energy resources, smart appliances, and smart circuit breakers.While we have outlined these use cases in detail through our earnings calls, previous webinars, and other marketing materials that are available on our website, the quick summary is that the TRUSense Gateway is capable of providing advanced metering capabilities without changing any existing legacy meters. It's capable of delivering substation level power quality measurement, at the residential meter socket for the first time. It enables utilities to prudently and safely integrate distributed energy resources, electric vehicle charging infrastructure, and smart appliances located behind the meter.And for the 220 approximate utilities that are proliferating broadband services, to address the broadband divide that surfaced during COVID-19 in Canada and the United States, this device enables those utilities to connect directly to the fiber optic cables, backhaul data from the meter socket itself and appliances behind the meter, as well as power optical network terminals to deliver those broadband services.Based on the feedback in the market, we continue to believe Tantalus is a first mover advantage, and we are actively preparing for a significant push to launch all 3 versions of the gateway during the first 6 months of this year. To that end, we are extremely excited to announce the first 2 wins for the TRUSense Gateway, including United Illuminating and the City of Bolivar, which we shared through press release a few weeks ago.In terms of what those 2 announcements actually mean, I thought it would be helpful to provide some context. As it relates to United Illuminating, which is an investor-owned utility in the State of Connecticut. The opportunity that we've secured represents the first time Tantalus has sold a connected device to an IOU. It also represents the first IOU to embrace the notion of the Cellular TRUSense Gateway.In United Illuminating's circumstances, they're facing 2 primary issues, 1 of which is the State of Connecticut is witnessing increasing demand for electricity, particularly during the winter, as well as the summer. They're witnessing some of the highest electric utility rates in the United States, and they've got aging infrastructure on utility poles in the form of transformers, as well as aging substation equipment that they rely upon.The TRUSense Gateway not only will help United Illuminating mitigate the peak demands by shifting load during the winter and summer through control of devices behind the meter, but it will also allow the utility to prioritize where to spend money in upgrading their infrastructure, based on actual data and the analysis of that data at the residential socket.United Illuminating is relying on a legacy AMI system that they deployed 5 years ago. That system is incapable of meeting the regulatory drivers United Illuminating faces today. The TRUSense Cellular Gateway is an excellent path forward for the utility to leverage that existing infrastructure while also prioritizing where to spend money moving forward.As it relates to the City of Bolivar, this is a public power utility that did not fall in our advisory committee when we built the TRUSense Fiber Gateway, not only built, designed, engineered, tested, and certified. In the circumstances of the City of Bolivar, it's a utility that is deploying fiber to also deliver broadband services.And we were humbled by the reference from the utility outlined in our press release, whereby after an exhaustive search by the utility for their next technology partner, Tantalus and the TRUSense Gateway were the only vendor that could not only meet their immediate needs, but ultimately become the basis for grid modernization for that utility moving forward.Both United Illuminating and the City of Bolivar are exciting opportunities for our team to demonstrate the capabilities of what we've developed, and we'll look forward to continuing to provide updates from those utilities as our deployments progress.In addition to the recent announcements of United Illuminating and the City of Bolivar, I'd also draw everybody's attention that since securing UL certification a few weeks ago, we have activated 6 field trials, some of which are with the advisory committee, some of which fall outside the advisory committee. And we've also secured initial orders from 12 utilities to-date and that number is counting.In terms of our launch of the TRUSense Gateway, we are actively pursuing the approximate $500 million of identified and qualified opportunities. That $500 million includes the identified $150 million of opportunity with our advisory committee members.In terms of how we will look to execute that, I thought it would be helpful to reference that our contract manufacturer of over 12 years that's been supporting Tantalus has the current capacity to build up to $150,000 TRUSense Gateways per year. That allows us to scale before we have to start thinking about an expansion in that factory or an alternative location to build the TRUSense Gateway.Overall, I'd say we are somewhat humbled in attempting to stay grounded by the progress that we've made and the momentum that we see building behind this technology. In the interest of time, let me just highlight a few things as it relates to 2024 and what our shareholders, our employees, our team is tracking towards.As referenced, we fully expect to deliver positive adjusted EBITDA for 2024. It may not be significant in terms of percentage, but we are and remain committed to getting back on track as the R&D investment in the TRUSense Gateway begins to dissipate through the second half of this year.We'll be very excited to continue to report on the progress we're making with respect to the number of utilities that are providing us with orders for the TRUSense Gateway. In conjunction with having a first mover advantage, our full intent is to try to capture that first mover advantage by getting the TRUSense Gateway in the hands of as many utilities as quickly as possible.And while we spend a lot of time, obviously, talking about the TRUSense Gateway and the impact we expect that to have on our business and the industry moving forward, it would be unfair to also reference or to not reference, excuse me, it would be unfair not to reference the progress and the momentum that we continue to witness from our TRUSync Grid Data Management software.As a quick reminder, the Congruitive software that we acquired 2 years ago is the foundation of our TRUSync Grid Data Management software capability. And as we witness an increasing number of utilities struggle with the notion of managing an increasing volume of data from devices like the TRUSense Gateway, it creates immediate opportunities for us to present a Grid Data Management software capability that we have not yet seen competitive threat surface yet in the market.Overall, we've gotten off to a good start in 2024. Our team remains excited about the prospects of the direction for the organization, and we look forward to continuing to provide hopefully favorable updates through the balance of the year.Operator, that's the end of our comments in the presentation. I'd now turn it over for any Q&A that may -- that we may need to address. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Nick Boychuk with Cormark Securities.

[Nicholas Boychuk, analyst]

It was great to see gross margins in the connected devices that remain above 40%. It sounds like there are a few positive moving parts that help that. Can you guys expand on what you're seeing with your key partners in supply chain and how we should be thinking about the margins for the connected devices, the legacy side, and TRUSense hardware moving forward?

[Peter Londa, executive]

Yes, hopefully I just flip backwards without making everybody nauseous. Nick to Slide 5 that disaggregates that information. You know, George, why don't you take a crack at that one, George?

[George Reznik, executive]

Yes, no, of course, Pete. And good morning, Nick. Yes, we did experience strong margins in the quarter of 42%. And as I said earlier, it's really partly transitioning out of COVID to more normalized level, really increased efficiency supply chain and lower shipping costs and better. And also the impact of some several price increases. We have to -- not recently, but we're seeing the impact of that favorably.In a nutshell, we do see continued margins in the upper 30s and really towards the low 40s for our core business, the TRUSense line of products that we have. And the impact on the TRUSense Gateway. We really see comparable margins, 35% to 40%, depending on volumes between individual customers. So we think going forward, Nick, that we'll have consistent and comparable margins.There may be some variability on a quarterly basis, but we're happy with the progress we made. And that's what we're looking at. And in terms of, working with our suppliers, we continue to have favorable terms with them on a payment basis. And as we scale the business, we did have significant inventory on mid last year as of addressed in the call, which has been more normalized at the end of Q1 and as well as our accounts payable, which really related to the timing of the inventory.We see that normalizing to more -- normalized cash conversion cycles going forward and supporting the scaling of the business. Peter, I don't know if you want to add some any additional commentary to that.

[Peter Londa, executive]

Other than the fact, we'll have to thank our landlord for the construction behind you this morning, George. No, I think you covered it.

[George Reznik, executive]

Yes, I apologize for that noise and outside our control, but thanks for your patience in that.

[Peter Londa, executive]

Yes -- I'm joking there. I just want to just to rectify one thing that you said, George, I think you were referring to TRUConnect as really the basis of the business that the TC module that gets integrated under the glass of meters, which has been the history, Nick, for the business that the TRUSense Gateway forthcoming, obviously.

[Nicholas Boychuk, analyst]

And kind of switching more to a growth angle and outlook. Can you guys comment on the nature of the 5 new utilities out of this quarter? Are they coming to you guys specifically to work with Tantalus on more of the traditional AMI side? Or I'm kind of intrigued if they're working with you guys more on the TRUSense like the illuminating and Bolivar, which I know it's also assuming are included in the 5 new ones this quarter?

[Peter Londa, executive]

Yes, I'll. I don't have a great slide obviously to cover that one, Nick. So I'll just leave this one up in the background. It's a mix. I'd say the wins in Q1 are vastly tied to the core competencies of the business. RFPs or we refer to them sometimes as unsolicited offers where utility we're able to navigate and avoid an RFP process. A lot of the wins in Q1 tied to work 6, 12 months ago.And so the bulk of what we've seen in Q1, is really still tied to the core competencies of the business, meaning our TRUConnect capabilities. And so that gives us comfort obviously, Nick, because it means we are still winning accounts and growing this business on its core. And we think that supports the investment thesis behind this company.It's almost a free option on the upside right now with the TRUSense Gateway from our perspective. With that said, shifting into Q2, the announcement of the City of Bolivar, thanks for the question, because it helps me provide some context, I didn't cover in my comments. But for the TRUSense Gateway, I don't know if we're the vendor of choice for Bolivar.They were pretty far down the path with another vendor that we compete with head-to-head. As we started to present the TRUSense Gateway to them, we leapfrogged that competition. And so, the decision from the City of Bolivar was absolutely tied to what the TRUSense Gateway does for that utility, and how it accelerates a number of initiatives around grid modernization.So I think as we see progress through the balance of this year and into next year, Nick, we haven't really thought about splitting out wins, sort of core versus TRUSense. And I could see some utilities like United Illuminating, especially IOUs, it's strictly TRUSense Gateway. I think for the public power and co-ops, we're going to see a lot of wins where the TRUSense Gateway is a pivotal component to that offering.So it would be a little bit hard to distinguish if that makes sense. I don't mean to tap to answer your question. It's just it's not a black and white answer.

[Nicholas Boychuk, analyst]

And then last one for me, your comments with the TRUSense that obviously sounds very favorable. How should we be thinking about the pace and the role of that product for groups like UI and Bolivar, but also along with the other 12 utilities you've now secured these orders from?

[Peter Londa, executive]

Yes, so I think yourself and some of the other covering analysts did a great job of writing some notes after our users conference, as a result of our Investor and Analyst Day, which we were privileged to host this year. I think Nick, the intent this year is, to produce somewhere between 3,000 and 5,000 TRUSense Gateway. That's sort of our trajectory.I'll probably be able to give a lot more detail on that in our next earnings call, after a few trips that we're making to the Philippines starting already with our Head of Manufacturing there as we're talking today. That first build for 2024, the intent is to really get as many devices in the hands as many utilities as possible. So I don't see substantial deployments this calendar year from any utility.With that said, in the hundreds, I think is very feasible utility-by-utility. As we think about UI and Bolivar, I think Bolivar's intent is to get the full deployment in less than 1 year, 2.5 year. There's a defined number of TRUSense Gateways that will be part of that deployment. And then my full expectation is that number expands after the full deployment of our system, including upgraded meters and TC modules on our TRUConnect capabilities.For United Illuminating, this is public. It's gone through a regulatory review. It's tied to what the state of Connecticut regulators, we refer to that as PURA, the Public Utilities Regulatory Authority. They created what's called a sandbox program, competitive bid, over 100 applications, 5, 6, something like that were selected. I think we ranked second just behind an electric bus program that the state's trying to activate.And so we anticipate getting to, I think the order of magnitude is about 1,000 homes, maybe 2,000 homes, so not too substantial. But the intent is to do that over an 18 months period. What the regulators are trying to evaluate along with United Illuminating, is how much load can be shifted over the course of multiple seasons. You kind of have to wrap around, it's actually like a 15-month window to capture data.You kind of have to see 2 winners in one summer. That's what the utility and the regulators are requiring. Assuming we're successful and we deliver on the ROI that we think is very achievable in conjunction with GE appliances, Savant, the University of Connecticut, and the National Renewable Energy Lab, the groups that we've brought to the table here.From pilot, if you will, up to 2,000 homes, the system would be fast tracked for approval within a regulatory review, meaning that if we meet the objectives and the ROIs within this time frame of the program, United Illuminating can effectively activate deployment without having to go back through yet another regulatory review, which can take a lot of time. So I think the acceleration there could be quite fast in the 2026, 2027 timeframe.Order of magnitude, United Illuminating delivers power to about 400,000 homes. It's not unrealistic. We see 10%, 15%, 20% adoption rate through recruiting, and I think United Illuminating's desire to not only manage load, but protect pole-top transformers. That order of magnitude -- that would be one of the largest projects in our company's history if we're successful.

[Operator]

The next question comes from Gianluca Tucci with Haywood Securities.

[Gianluca Tucci, analyst]

Great color that you provided in your preamble, Pete. On the field trials that are out there and I guess pending launch, can you talk to some of the KPIs that customers are looking for and how long do these field trials typically last before they give you the green light to actually go live and deploy?

[Peter Londa, executive]

So, sort of similar comment. Can Nick's questions on Gianluca, and thanks for the question as well and thanks for activating and initiating coverage this calendar year. We're excited to include Haywood as part of the firm supporting the company and providing coverage, so thank you for that. It's not a black-and-white answer. Let me bifurcate your question between KPIs and then field trial and what that looks like.On the KPIs side, it really depends on the use case. The easiest ones to quantify and sort of articulate are sort of the power quality measurement and the behind-the-meter control. As it relates to power quality measurement, what we're seeing, and my gut instinct is what's going to drive the adoption here, is circumstances where utilities have aging infrastructure around their transformer fleet.And we've talked about this quite a bit. The lead times for transformers have exceeded 2 years in some circumstances. Mind you, that's up from like 6 to 8 weeks for pole-top transfers, transformers in a couple months for substation or distribution transformers. So it is a phenomenon and a serious problem. In addition to those lead times, Gianluca costs are up like 4 and a half to 5x in some circumstances.So managing the existing fleet of transformers, as well as protecting the new transformers, given how expensive they are, is really critical. And so this very granular control, or excuse me, this very granular measurement of power quality at the meter socket, is going to enable utilities to proactively identify where they have issues, and then go figure out how to solve it.Whether that means maintaining the transformer a little bit differently, moving transformers around where there's an under-voltage or an overvoltage circumstance, making sure that the devices they just bought are actually operating the way they're supposed to. In those circumstances, that the KPIs are tied to asset protection, they're tied to power quality measurements.In many circumstances, utilities report that. SAIFI, SAIDI, and CAIDI are a couple of abbreviations that may not have a lot of meaning to focus on this phone call, but those are measurements that utilities track pretty rigorously. And so by tracking KPIs or by building KPIs around those power quality statistics, the TRUSense Gateway place right into it.On behind the meter, it's all about how much load can be controlled, not just controlled but measured and verified, measured how much is available, verified in terms of actually actioning taking load off the grid. We're seeing a couple of different things, where we get really excited about the partnership with GE Appliances and so on as we can take a water heater, electric today, soon a more diverse set of water heaters that GE Appliances is quickly working on.But we can turn that water heater into 6 or 7 kilowatt hours of available and dispatchable load, aggregate that across 20,000 homes, 50,000 homes, 100,000 homes. You're talking megawatts, megawatts tied to dollars. So the KPI there is economic for sure. As it relates to field trials, sorry, I get excited and passionate about this stuff, because it's real and it's important, but as it relates to field trials, it's going to vary.We've got a couple of advisory committee members that are going to use the field trials we've run as their field trial, meaning once the field trial is over and we validate what we're seeking to validate, they're going to deployment, period, full stop. There's some utilities in the advisory committee and in the sort of identified list of 30 that we are actively involved with and some of which have already started to convert.Some of those are going to do their own field trials, some are not. My experience in this, a Tantalus over the last decade, I like to kind of use a 3 to 6 month bell curve for field trials. Sometimes it's a little bit longer. It's not typically much shorter. And in some, in most circumstances on Lucas to validate the technology and then to make sure that their systems, their processes, their training, their employees know what to expect, know how to deploy it, know how to manage it once it's in the field.Some utilities are much faster and organized around that. Some have a little bit more trouble with process change. So that's what really dictates and fluctuates those field trials. But so I think a big good bell curve is 3 to 6 months, meaning we should see a number of trials, a number of pilots, a number of phase 0 deployments this calendar year. A lot of those then activated deployments in 2025 and that's where we think the revenue ramp is. And I think you picked that up well in your report after PLC.

[Gianluca Tucci, analyst]

Just secondly, and tying it into ARR, like the organic growth there, how do you see the trajectory of ARR growth changing as you deploy TRUSense into the field?

[Peter Londa, executive]

So pricing on the device is going to vary based on bells and whistles and single band Wi-Fi, dual band Wi-Fi, just PLC a couple of ways to communicate behind the meter. The way we are envisioning this or the way we are beginning to secure orders, there is an upfront software license that's embedded on our custom ASIC, the little square chip system on chip that is not only in the TRUSense Gateway, but it is on all connected devices, meaning compatibility across different generations of technology for panelists.Such an important point, by the way, when you look at some of our competition and a great path for differentiation of panelists versus others. There will be recurring revenue through 22% annual maintenance on those software licenses. What's not included in the upfront is the transformer analytics tool as an example. That is available as a SaaS offering and what we anticipate seeing to drive ARR over the long-term, Gianluca, is as we start to collect data from this device, from the TRUSense Gateway, particularly power quality measurement, will be able to use our own analytics tools to pinpoint where utilities may be blind.And in conjunction with that, then present those issues that we've identified to the utility as the sales tool to justify an incremental spend on our SaaS offerings for transformer analytics as a very specific example. So I anticipate a decent amount of recurring revenue scaling per device per year. Last but not least, we are shipping the TRUSense Gateway with an instance of our TRUSync Grid Data Management capabilities embedded in the silicone of our chip.As we generate more data for the utility, it's going to create a problem, to how to manage that data and how to make that data accessible, across the entire organization, meaning the utility. It gives us an opportunity for the sales team and account management team to go back and start to help solve that problem on grid data management. To the extent we're successful, activate, give them a key, activate the software, it's already there.So I think there's going to be a lot of pull through. You know, upfront, it's heavy on the hardware, right? We're getting paid for the device. We've got gross profit margin. It drives cash flow. Long-term, this device is going to sizzle, it really is, because of the data.

[Operator]

And the next question comes from Daniel Rosenberg with Paradigm Capital.

[Daniel Rosenberg, analyst]

My first one comes around the 12 utilities that you mentioned and others. I was just wondering if the entirety of the steering committee is part of that group. Anything to comment on the constituency?

[Peter Londa, executive]

Thanks for the question and I fully appreciate it. The answer is not all of them yet. So there's a quick upside in that number, Daniel. A good number of them have placed orders. The ones that are awaiting the Cellular Gateway, not yet because we still have work to do with the Sierra Wireless, cellular radio that we're embedding into the device. And then managing through the FCC certifications, all of which are, I think at this point, pretty straightforward.There's still work to be done, but I don't see a ton of risk in that effort. So there are a couple of utilities that are still awaiting. And from there, I fully expect to get those orders. Not I, the team will get those orders.

[Daniel Rosenberg, analyst]

And then you had mentioned some people in terms of the expectations of deployment that some will start with a field trial and small follow-ons with potential pull-ons fully and others may go directly to a more substantial deployment. I was just wondering, are these indications in discussions? How formal are these orders? Are they contractually signed? Can you just elaborate on how much visibility you have to follow-ons?

[Peter Londa, executive]

Yes, again, Daniel, it's a very fair question. Little hamstrung to give you a full answer today. The initial orders that we've received are not for full deployment. They are orders for utilities to activate their field trials, meaning we're getting paid for the devices and our time and support to get those moving. From those field trials, we would launch into much more comprehensive contracts, and orders in terms of dollar order of magnitude.I'd say we have a number of utilities, United Illuminating, contracted, Bolivar contracted for those deployments. We have a number of other utilities where we are engaged in contract negotiation. That's about as far as I can probably push it in answering your question today.

[Daniel Rosenberg, analyst]

And then, I was just curious on the funding opportunities out there for customers wanting to pursue TRUSense. Can you just speak to, does everybody qualify under the same programming? Are there different buckets to reach into, whether you're IOU or co-op or public power? Can you just speak to the security, or the resources around funding for TRUSense?

[Peter Londa, executive]

So I don't have a slide to flip to it. You may be familiar with our summary of stimulus opportunities that are, I think, still in the appendix of our investor presentation on the website. I know Deb and the team at Adelaide are working to get our investor presentation updated, with today's results or materials that we're sharing from yesterday's press release, obviously, in filing, but some of the materials in this presentation here.So, we'll make sure that that summary is still included for anybody that's interested. As it relates to the TRUSense Gateway, there are a couple of different buckets at a very high level. The abbreviation grip is $0.5 trillion, ballpark maybe a little bit more, tied to grid resiliency and modernization. The TRUSense Gateway checks that box. There's also a substantial amount of money referred to as BEAD, just in the interest of time.It's a broadband stimulus package. The TRUSense Fiber and TRUSense Ethernet Gateways check the box there. Order of magnitude, I'll top my head, $800 billion, $900 billion available to utilities where the TRUSense Gateway is an allowable use. We are actively engaged in trying to pursue applications with certain utilities. I'd say some utilities are very excited about it.Some utilities don't want to get caught up in delays, or caught up in incremental reporting. So it's really a cultural decision within the utility, whether they're going to actively pursue, but there's a lot of money floating through the system here in the United States. Daniel and the TRUSense Gateway checks a lot of boxes with a lot of different programs. So we're going to be pretty active on it over the next 3 years.

[Daniel Rosenberg, analyst]

Lastly, just on the SEC process, it sounds like you have a lot of confidence in getting through the process. I think you mentioned a Q2 timeframe. Can you just elaborate on the specifics that you need to cross that bridge? What are you waiting on?

[Peter Londa, executive]

So for the cellular, for the Ethernet, or both?

[Daniel Rosenberg, analyst]

For cellular, please.

[Peter Londa, executive]

Okay. So I think the terminology, our hardware engineering team will probably slot my hand after the call, but it's admitted and radiated admissions or something like that. Trying to boil down, because I am not smart enough to be an engineer, but when you put a radio chip or cellular radio chip in a container like the TRUSense Gateway, you got to be conscientious of how the spectrum responds.We got a lot of communication stuff in here, including a Wi-Fi chip and Home Plug 2.0. So you put cellular for the backhaul, meaning that's how we're communicating to and from the device, coupled with utility-grade Wi-Fi and power-line communications through Home Plug. You got a lot of spectrum that needs to be managed. Incrementally, so we're still working on that.To get deeper, Daniel is probably better for a one-on-one call, and to the extent you're interested, can Paul, members of the engineering team that will -- be able to articulate that much more effectively than George or me? Or I should say what I can. But as it relates to the FCC, that's really making sure that the use of the spectrum on 5G or 4G LTE stuff, it really is making sure we're not interfering with emergency signals or licensed spectrum.So -- that process is very straightforward. Where there's still some engineering work is how do we cope with a 5G or private LTE cellular radio coupled with Wi-Fi coupled with PLC? There's nothing that's insurmountable there, and frankly, with the team that we have on staff, nothing that we haven't addressed previously with devices. It's just a function of tinkering and tinkering. I think our gut instinct is, end of this quarter is still a good bogey. It may slip into Q3.We've actually started to jerry-rig a few things to demonstrate cellular capabilities for some utilities, one in Texas that was at our users' conference as a prospective utility, so we're pretty excited about that. But I think it's forthcoming. I don't see a significant amount of risk at this point on that cellular gateway. And Daniel, as we've talked about, right the Cellular Gateway is the one that's most applicable to utilities across Canada and the United States.

[Peter Londa, executive]

I know we're beyond time. I don't know if there are any other questions, Operator.

[Operator]

And the next question comes from Gabriel Leung with Beacon Securities.

[Gabriel Leung, analyst]

To sneak one in. I think it's part of the user conference you had talked about, was it Irby being obviously one of your key channel partners, especially on the [indiscernible] side of things. I think they were holding 30-plus or so accounts on the [indiscernible] side that were waiting for a UL certification. So just curious if you'll be able to find an update on the pipeline there and what you're expecting in terms of those accounts to convert over the next little while?

[Peter Londa, executive]

Yes, Gabe. So thanks for hanging in here. And for other shareholders that are still on or investors still on, thank you for the patience. I'll take the comment that we either got a short in the presentation or I got to figure out how to shorten my color commentary on Q&A. Again, my apologies for the passion. Yes, so good news there, Gabe. Irby is proving to be a tremendous first channel partner.I put him at this point as a strategic partner to Tantalus. We actually have folks on site at their center this week training up their field services team, their account and sales team, and have done some of that in conjunction with a few of their targeted accounts. One of the field trials is, Oliver came through Irby and one of their key accounts is part of our initial field trial. So I'd say the level of activity with Irby we anticipate is only going to increase now that we have UL certification on the Fiber Gateway.And as a reference, Irby is one of the leading providers of fiber optics, massive organization. They'll play with the Cellular Gateway as well, because they do a lot across the utility industry in general. But where we see a lot of traction and scale quickly is going to be at the utilities where they have already deployed or are in the process of deploying fiber networks.And the Fiber Gateway or the Ethernet Gateway plug right into it. So, yes, Gabe, I will be excited to, I think, share additional information as we get through this into the second half of the year. But it's, from my perspective, it is at the executive level of our team, and continue to escalate inside their organization in terms of the strategic nature of what we're doing together.

[Gabriel Leung, analyst]

Just one last question for me, I believe, for George. You identified sort of $1.5 million of costs that relate to TRUSense in the quarter. So with, the fiber UL served gets out of the way. Would you anticipate some of those costs to line up a little bit, or should we expect those costs to sort of remain flat just like I've given the remaining certifications and the ramp up sales. How should we think about that and just offering expenses overall relative to Q1 for the remainder of the year?

[George Reznik, executive]

Yes, no, thank you, Gabe. And we did, you know, $5.5 million in Q1 and we did have significant marketing activities as well as commercialization and development of the TRUSense Gateway in that period. Q2 tends to be a significant period. We had our TUC conference, but we really are commercializing 3 variants of the TRUSense in parallel here and including certification of field trials.So, the operating expenses this quarter will be, we anticipate to be higher to this, then there were this quarter reflected as investments as well as the ramp up of training, field service, not only supporting Irby as Pete said, and their service team and sales team, but also our own team so we can get through these trials, and get our customers deployed quickly.And we really see $0.5 million of external costs really trending down, certifications, prototypes, external contractors as the products are commercialized and ready for prime time and roll out. And really offsetting that is incremental investment of the field sales deployment sales, and continued development as we add additional functionality. I'll use the iPhone as almost a parallel as they launched the I3 -- iPhone 3 and now we're at the 15 and continue to enhance and maintain and grow market share.So that's our plan and we can see towards the back of the half, is really trending, a little lower than this quarter but reflecting those investments. So they'll offset to a large extent, okay, the $0.5 million, but just redeployed investment to support the demand that we're witnessing experience from our customers in the market.

[Gabriel Leung, analyst]

I'm sorry, I just wanted to ask 1 more question. Just on the revenue side of things, I know obviously Q1 was a bit tougher on the hardware side, but with the orders that you've closed and just based on the commentary from your metering partners, to anticipate that the connected device line will return to year-over-year growth for the remainder of the year?

[Peter Londa, executive]

Go ahead, George.

[George Reznik, executive]

Yes, no, of course a lot, we did a really strong orders, 22% over the prior year quarter. And we're really seeing the, the fulfillment of those orders Gabe, into Q3, Q4 and even into early next year. So, we do see, the strengthening of the traditional -- line of business and growth in revenue on our connected devices. And then complementing that, of course, will be the initial sales and related fulfillment of revenue for the TRUSense Gateway towards the later half of this year. So we do anticipate growth.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Londa for any closing remarks.

[Peter Londa, executive]

Thanks, operator. On behalf of our entire team, thank you all for the continued interest, and allocating time to receive today's update. Appreciate questions from analysts and as always, Deb, thanks for helping us get organized and many shareholders and investors that have questions, can certainly direct outreaches to her. We'll look forward to providing an update on Q2, as we continue to move through the quarter. I hope everybody has a great day. Thank you all.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.